Globalization and Inflation - Impacts Unlikely to be Large and Permanent

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There are serious problems - both conceptual and practical - with the identification of the impacts of globalization on inflation. The evidence that is nonetheless referred to suggests that these impacts are insignificant, at least for the euro area countries. The impacts of freer trade seem more pronounced when one considers developments in prices, wages and unit labour costs in specific branches of manufacturing, particularly in branches most exposed to competition from low-wage countries. But even that evidence must be interpreted with care. The fact that research does not support strong hypotheses on the role of globalization in reducing inflation over the recent 15-20 years suggests that other secular developments (changes in monetary, exchange rate, fiscal and social policies, etc.) may have been decisive. Besides, the progressing disinflation seems to have been coupled with a falling share of labour in national income (i.e. falling real unit labour costs). Globalization may have helped to moderate the wage aspirations of the workforce in the advanced countries - thus playing a prominent role in disinflation. The impact in question need not have been direct. All that is required for that impact to have real consequences is that the labour in the advanced countries is convinced - which largely seems to be the case - that its services could be easily substituted by the services performed by workers in the low-wage countries.
Some common-sense views on (dis)inflationary impacts of globalization
Globalization has become a very important (or perhaps the most important) theme in the public debate on the course of evolution of real economies - at both global and national levels. But for quite a long time globalization has been referred to in discussions on topics other than inflation in the advanced economies. Primarily, globalization has been invoked while focusing on e.g. the consequences of the liberalization of capital flows, the build-up of major global financial imbalances, the rise of strongly competitive 'emerging markets' and its impacts on labour market developments in the advanced countries, etc. Only recently, one observes a more intense interest in exploring, somewhat more systematically, the possible links between 'globalization' and inflation. 
The common-sense motivations for linking globalization to inflation (primarily in advanced industrial countries) seem quite straightforward. They all start from the notion of progressing opening and liberalization of national markets for goods, capital (and - albeit to a lesser degree - labour), declining costs (e.g. of transportation) and - eventually - tightening international integration. As domestic prices (and also wages) are increasingly left free to interact with those abroad


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